Jared Serbu, DoD reporter, Federal News Radio

In the Defense Department, operating under a continuing resolution means the military has more money in its overall acquisition accounts for 2013 than it requested. That is, until sequestration took effect, slicing each program's funding by approximately 9 percent.

The Pentagon doesn't plan to cancel any of those programs, at least for now. But it is trying to minimize the damage caused by the cuts.

In the turbulent 2013 federal budget environment, Pentagon leaders are most worried about the shortfalls in their operation and maintenance accounts and the impact on military readiness. The autopilot continuing resolution from 2012 means the O&M accounts are significantly underfunded.

But that's not to say the military services' modernization programs won't suffer. There are roughly 2,500 in all, and each will suffer its own sequestration cut irrespective of its importance to the current defense strategy.

"The mode that we're in for fiscal year 2013 is basically damage limitation," said Frank Kendall, the undersecretary of defense for acquisition, logistics and technology. "We've got to make some adjustments. This is doing an enormous amount of damage. It is working against all of the things on my list right now."

Kendall has five objectives on his priority list:

Developing affordable procurement programs

Supporting current military operations

Evolving DoD to a more efficient acquisition system

Improving the health of the defense industry

Building and sustaining a top notch DoD acquisition workforce.

That last item is becoming more and more difficult in the current budget environment, Kendall told a conference organized by McAleese and Associates and Credit Suisse in Washington Tuesday.

"We've had a lot of our people leave. I got an email this morning that said one of our best contracting professionals was taking a job outside the department," he said. "When you've had pay freezes for multiple years and you're facing a 20 percent pay cut this year, it's easy to understand why someone would do that. We've got a very loyal and dedicated workforce, but this is doing damage. It's doing a lot of damage to our future."

The acquisition workforce will have its hands full this year trying to modify programs to fit within the constraints of sequestration. The budget-cutting mechanism doesn't give the Pentagon choices about where to make the procurement program cuts. Each one is cut equally, so Kendall said DoD does not expect to outright cancel programs, at least in the current year.

"We're not precipitously terminating or renegotiating contracts, but people are starting to lower the level of effort or work in some cases," he said. "What I've told people to do, at least for this month, is to hedge where they can. Delay making major adjustments if that's going to do an awful lot of damage. Once we figure out what our long-term budgets look like, we can try to re-stabilize things and do some long-term planning, but right now we're just trying to get through this. Right now I'm planning in terms of days."

Creative contracting needed

In the current year, DoD says the abrupt modifications to acquisition programs will make virtually all of them less cost-efficient. In contracts that include multiple units of a particular product, DoD will have to buy fewer, driving individual unit costs upward. In one-per-year programs like naval construction, Kendall said acquisition managers will have to be more creative.

Ashton Carter, deputy secretary of defense, DoD

"People are taking different approaches to try to manage their way through this. Shipbuilding's got a problem because it's hard to build 90 percent of a ship, but you can do things like deferring the delivery of spare parts so that you can keep the core program going," he said. "You're deferring a bill, and you're probably increasing the bill when you do that."

If Congress doesn't change the Budget Control Act, the 2011 law which created sequestration, DoD will operate with $50 billion less than it would like next year because of the discretionary budgetary caps the law imposes over the next decade. The punitive across-the-board cuts imposed for 2013 under sequestration, however, would not be in effect, so DoD could make choices about where to allocate its resources.

If the caps on defense spending remain in place, the military would have to make decisions in 2014 and beyond to decrease the size of military forces and the civilian workforce, and it also would begin to terminate contracts, said Ashton Carter, the deputy secretary of Defense.

"That's not something one wants to do, particularly with a program in which the need is there and we've already made a substantial investment. No one wants that," Carter said. "But if we're driven to lower budget levels, we're not going to react just by stringing contracts out. That's the worst thing for the taxpayer and for warfighters, and we're not going to do that."

Carter said the defense industry would naturally shrink as well under the 10-year caps, and in that scenario, the department would have to pay extremely close attention to how the industrial base responded.

Carter and Kendall repeated the Pentagon's stance that it is not supportive of any further mergers or acquisitions of its large, prime contractors.

Carter said while those large firms would no doubt be impacted by the budget reductions, DoD is more concerned about small firms at the lower tiers of it supplier base.

"They are more whipsawed by this circumstance, and frequently they don't have the resiliency to go through that and still survive," he said. "But their health is very, very important to us. They are the principal source of new technology and new people in the defense sector. We need to welcome companies like that and watch out for their welfare. Many of them are trying to do defense and non-defense business at the same time, and we want that. We don't want them exiting the defense business because they find it's too turbulent, too uncertain or just plain too difficult."

Slow starting avalanche

DoD said in preparation for this year's budget turmoil, it's been frontloading its cutbacks in areas that would have the least long-term impact. But the department says the effects will become more and more visible as time goes on, including the start of furloughs to the civilian workforce late next month.

Kendall said DoD is making adverse decisions today that will become apparent down the road.

"We've described sequestration as a slowly-starting avalanche of things, where at the beginning, it doesn't seem like there's a lot going on. There's a lot going on," he said. "At the end of the day, it's a 10 percent cut that's taken in a very, very inefficient way. It doesn't allow us to prioritize and it doesn't allow us to put money where we need it the most. The effort that's happening on Capitol Hill right now only partially solves the problem. It gives us more flexibility, but the cut is still the same size. We've got some really big problems there, and it isn't as visible as it otherwise might be, in part because it's happening slowly over time."